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A Minimum Productivity Law

The impact of the minimum wage on unemployment is a divisive issue among economists. Simple labor economics might seem to predict that a wage floor would necessarily lead to a labor surplus. But it turns out that there are other ways for markets to adjust. This can be a hard pill for neoclassical economists and those who think like them to swallow, but it helps if you think of the minimum wage as it really is: a minimum productivity law.

That’s right. Even if you buy those economists who have modeled the economy maintaining or increasing jobs under a minimum wage hike, it is still identically true that employers won’t hire anyone unless they believe they will be more productive, on the margin, than their labor cost. So they either believe they will pass the wage on in price hikes, or that they can now work people harder or differently to let their workforce’s marginal product keep up. This is one reason Ozimek suggests that conservatives might learn to love the minimum wage hike. Personally, I suspect you can have these unanticipated effects only with small marginal changes in the minimum wage. There’s only so much worker productivity lying around to be gathered up by allegedly sleepy capitalists waiting for a minimum-wage lightbulb to turn on over their heads. If the minimum wage gets large enough it will function like any other price control, i.e. really badly.

Unfortunately, the law will also put a bunch of teenagers out of work. I very much doubt the law’s progressive supporters want that, or the “minimum productivity law”, or the inflation in basic foods and services that would come from passing on the additional labor cost. But don’t let that stand in the way of something that sounds good.

Eventually, if employers are not successful passing on the incremental cost in labor, they will seek to reduce the workforce. Then the state must add workplace practice restrictions that make it difficult or expensive to do so, and sooner or later you have a European labor situation, where nobody wants to hire young people for fear of getting stuck with them.

It sounds good in a speech, but promises unintended and undesirable consequences.

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One comment on “A Minimum Productivity Law”

Good Morning, I would like to find out what is the International or South African Labour Efficiency or Productivity level is it 75% or not because most of the organisations who are on incentive scheme reward their employee from 75% productivity level = upwards.